The main benefit, according to the Wall Street Journal: a smaller short position makes the company less susceptible to a squeeze. Ackman still believes that Herbalife is destined to plummet. In his letter to investors–via the Journal–he wrote:

“We believe it is only a matter of time before the Company is shut down and prosecuted by regulators,” he wrote, later saying he had not seen “a less attractive risk-reward ratio than a long investment in Herbalife common stock at current levels”

D.A. Davidson’s Timothy Ramey notes that the new position seems “at odds” with Pershing Square’s goals. He writes:

If it truly still believes the go-to-zero thesis, and Mr. Ackman writes in his letter that he does, then it makes no sense to put a time element into this trade. He now needs to be both right on the go-to-zero thesis and right on the timing. On one thing we do agree – Pershing Square has significantly reduced the risk of unlimited losses, but has increased the certainty of a total loss of the original $1 billion short position as the puts expire worthless. The counterparty to his trades indeed has a winning hand.

The market, however, clearly hasn’t taken it that way, as Herbalife’s shares have dropped 4% to $70.21. Direct seller Avon Products (AVP) has fallen 1.2% to $20.67, while nutritional-product retailer GNC Holdings (GNC) has declined 1.6% to $53.81.

About Stocks To Watch

Earnings reports, corporate strategies and analyst insights are all part of what moves stocks, and they’re all covered by the Stocks to Watch blog. We also look at macro issues, investor sentiments and hidden trends that are affecting the market. Stocks to Watch gives you the full picture of the U.S. stock markets, all day long.

The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.